Capital Gain Exclusion Question

[ca99214]

I purchased my home on 10/1/2008 as my primary residence and lived in it for several years. I converted it to a rental property on 5/1/2017. I then converted it back to my primary residence on 12/31/2022. I then sold the property on 12/31/2024. So it was my primary residence for 2 of the last 5 years. Can the entire gain from sale be excluded from capital gains tax on my federal income tax return since it was first my primary residence before I rented it out?

[Vanessa A]

Yes.  Even though this was at one time a rental property, as long as you lived in the home as your primary residence for 2 of the last 5 years and have not taken the home sale exclusion gain in the last two years, you can still claim the exclusion, although it may not be the full exclusion.

When you enter the sale in TurboTax under less common income>>Sale of Home, you will be asked if you used the home for anything else since you bought it and the amount of depreciation you took on the home. Then it will tell you if you are eligible for the tax free gain based on all of your answers. 

[Hal_Al]

Q. Can the entire gain from sale be excluded from capital gains tax on my federal income tax return since it was first my primary residence before I rented it out?

A. No. The gain will be prorated between the residence time and the rental time. Only "non qualified use" after 2008 is prorated. Deprecation since May 6, 1997 must still be recaptured, even in a  home sale exclusion situation. The recaptured depreciation is not included as a part of the exclusion calculation.

When you enter the home sale in TurboTax (TT), and follow the interview carefully, TT completes the "Home sale work sheet" (see screen shot in other reply) to handle that complex calculation of the partial home sale exclusion, non qualified (rental) use capital gain and depreciation recapture.

[ca99214]

Is there an exception to this proration if the home was initially purchased and used as a primary residence? TurboTax asks in the interview the following:

"Did you use this home for anything other than your primary home? Let us know if there was any time after 2008 where you used your home for reasons other than as your primary home. Note: If you used your home for reasons other than as your primary residence after it was no longer your primary home select "No". 

When you select "No" the TurboTax shows the entire capital gain as excluded. If you select "Yes" then it uses the proration for the non qualified use period. My initial answer to the TT interview question would be "Yes" however the note indicates that the answer should be "No" since it was first my primary residence then became a rental.

[Hal_Al]

"Note: If you used your home for reasons other than as your primary residence after it was no longer your primary home select "No". "

I'm of the opinion that only applies if after moving out you never moved back in because of the words "no longer".